CLASS 12TH
SUBJECT:MACROECONOMICS

BASIC CONCEPTS OF MACROECONOMICS

 Types of Investment:

1. Induced Investment:

Real investment may be induced. Induced investment is profit or income motivated. Factors like prices, wages and interest changes which affect profits influence induced investment. Similarly demand also influences it. When income increases, consumption de­mand also increases and to meet this, investment increases. In the ultimate analysis, induced investment is a function of in­come i.e., I = f(Y). It is income elastic. It increases or de­creases with the rise or fall in income, as shown in Figure 1.

• Microeconomics is the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms.
• Macro economics is the study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and inflation.
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• FINAL GOODS AND INTERMEDIATE GOODS

Final Goods Vs Intermediate Goods:

BASIS	FINAL GOODS	Intermediate Goods
Meaning:	Final goods refer to those goods which are used either for consumption or for investment.	Intermediate goods refer to those goods which are used either for resale or for further production in the same year.
Nature:	They are included in both national and domestic income.	They are neither included in national income nor in domestic income.
Demand:	They have a direct demand as they satisfy the wants directly.	They have a derived demand as their demand depends on the demand for final goods.
Value addition:	They are ready for use by their final users i.e. no value has to be added to the final goods.	They are not ready for use, i.e. some value has to be added to the intermediate goods.
Production Boundary:	They have crossed the production boundary.	They are still within the production boundary.
Example:	Milk purchased by households for consumption, car purchased as an investment.	Milk used in dairy shop for resale, coal used in factory for further.

How to Classify Goods as: Intermediate Goods and Final Goods:

The distinction between intermediate goods and final goods is made on the basis of the use of product and not on the basis of product itself. A commodity can be an intermediate good as well as a final good, depending upon its nature of use.

For Example:

(i) Sugar is an intermediate good when it is used for making sweets. However, if it is used by the consumers, then it becomes a final good.

(ii) Similarly, milk is an intermediate good when it used in dairy shops for resale. However, it becomes a final good when it is used by the households.

• DIFFERENCE BETWEEN CONSUMPTION GOODS AND FINAL GOODS

Basis	Consumption Goods	Capital Goods
Satisfaction of Human wants	These goods satisfy human wants directly. So, such goods have direct demand	Such goods satisfy human wants indirectly. So, such goods have derived demand
Production Capacity	They do not promote the production	They help in raising production capacity
Expected Life	Most of the consumption goods (except durable goods) have limited expected life	Capital goods generally have an expected life of more than one year

• DIFFERENCE BETWEEN DEPRECIATION AND CAPITAL LOSS

Basis	Depreciation	Capital Loss
Meaning	It refers to the fall in the value of fixed assets due to normal wear and tear, the passage of time or outdated technology	It refers to the loss in value of the fixed assets because it is outdated
Provision for loss	Provision is made for replacement of assets as it is an expected loss	No such provision is made in case of capital loss as it is an unexpected loss
Production Process	It does not hamper the production process	It hampers the production process

•  INVESTMENT

In simple terms, Investment refers to purchase of financial assets. While Investment Goods are those goods, which are used for further production.

1. Induced Investment:

Real investment may be induced. Induced investment is profit or income motivated. Factors like prices, wages and interest changes which affect profits influence induced investment.  In the ultimate analysis, induced investment is a function of in­come i.e., I = f(Y). It is income elastic. It increases or de­creases with the rise or fall in income.

2. Autonomous Investment:

Autonomous investment is independent of the level of income and is thus income inelastic. It is influenced by exogenous factors like innovations, inventions, growth of population and labour force, researches, social and legal institutions, weather changes, war, revolution, etc

Gross Investment:-Gross investment includes the total of all investments made in a country during one year.

Net Investment:-Net investment equals gross investment, minus annual wear and tear.

Indirect taxes

Indirect taxes are those imposed by a government on goods and services, in contrast to direct taxes, such as income and corporation tax, which are levied on incomes of households and firms. Indirect taxes are also called expenditure taxes.

Factor Payment (Income):

1. It comprises rent, wages, interest and profit.

2. It is received in return for rendering productive service.

3. It is an earned income (earning concept).

4. It is bilateral payment.

5. It is included in national income.

Transfer Payment (Income):

1. It comprises gifts, subsidies, donations, scholarships, etc.

2. It is received without providing any good or service in return.

3. It is an unearned income (receipt concept).

4. It is unilateral payment.

5. It is not included in national income.